Will Germany Bully Europe Over the Brink?

There's still hope for Europe to avoid a crisis, but it will first have to reject Germany's self-righteous demands for austerity.

The audacity Germany has shown in floating a demand to manage Greece's finances is a window on the leaders of that country and how much perspective they've lost. Let's be clear; not all in Germany agree with this narrow, insensitive stance and the uninformed and uneducated demands for austerity economics in debt-ridden and recessionary nations. For example, there are political parties in Germany that want their country to take the lead on a Marshall Plan for the periphery of the eurozone. But they are not the ones setting policy.

I am tempted to say that antediluvian economics is ruling in Germany, but it may not really be about economic theory, but rather superior pride, irrational fear of inflation, and perhaps vindictiveness. It's as if a German version of our own Tea Party is now running economic policy in Europe. Germany reduced its unit labor costs beginning in the late 1990s, which were higher than much of the rest of the EU, but with the euro fixed, they benefited as their export prices remained low. Could they have done well without their eurozone trading partners buying more from them than they were selling? And they lent them the money to do so. Do they have no moral obligation here? Without the fixed euro, the DM would have soared.

Then there is David Cameron of Britain and his finance minister lecturing the rest of Europe about how to run their economies. Move over Monty Python. As everyone now knows, Britain's GDP is still below its pre-recession high, its deficit is high and not falling as promised, it may have slid into recession, and often ignored, average wages are well down since a recovery supposedly began. The bombast with which Cameron proclaims the rightness of his austerity economics while his people suffer is right out of school-boy debating. This time his countrymen will lose the debate, not only him.

There are some hints that people of influence are talking sanely and recognize growth is necessary and that austerity in this environment is tragically anti-growth. Some believed there would be some actual policy initiatives in Monday's summit, but there weren't. Instead, the EU agreed to a nutty deficit limit for all its nations. The good news is that they won't abide by in a crunch. Must we remind ourselves yet again that it was Germany that conspicuously violated the prevailing EU limits on deficits to 3 percent of GDP when it had problems? Some say the current limit is over a full economic cycle and therefore not that stifling, but 0.5 percent of GDP is stifling any way you size it up.

Other analysts are saying that now that Germany has won this round it will support further lending by the European Central Bank. What a group! Remember when Trichet, then the head of the ECB, actually raised interest rates in the spring of 2011? It is all a matter of confidence, he said. But trying to cut spending in the face of recession will not generate confidence; only renewed growth will.

It looks like Spain may have had enough of austerity economics. After all, it didn't run crazy government deficits in the first place. I bet few non-expert citizens know how little government budget deficits had to do with the crisis, including in the U.S. For a long while, Spain's leaders kept promising they would meet reduced deficits target, but slow growth and suddenly outright negative growth is reducing tax revenues far faster than expected. Spain is a dog chasing its tail, and it may finally realize it. Deficits as a percent of GDP come down a bit at the expense of a recession and high unemployment, but not nearly enough to satisfy Germany (or, apparently, bond markets) or to meet political promises. If Spain pursues further austerity, it may remain in recession for several years. What will that do to their democracy? Let's hope they stop.

The Greeks would not stand for Germany running their country. Big surprise. Sarkozy then said no one should stand for it, and Merkel apparently backed off. Who knows if she was ever foolish or insensitive enough to believe in it? But she has some mighty thick-headed colleagues in her country to deal with. Meantime, Portugal is flailing, deep into recession, so it's not only Greece we must worry about. Spain just reported negative growth. Ireland remains a mess, despite momentary cheers that austerity was working. Alas, GDP is still 10 or 15 percent below its pre-recession high there.

Germany wants to cure the problem by getting wages to fall -- a solution it imposed on itself in the late 1990s -- in Greece, Spain, Portugal and so on. It is commonly called an internal devaluation. Had everyone not been linked to the euro, some could have devalued explicitly. With an internal devaluation, these countries would allegedly reduce their European imbalances by importing less and exporting more as prices fell -- and in the case of Greece in particular, attracting more tourists as prices fell. This is a long, painful process that will probably only marginally change imbalances.

Europe needs growth, but it is being handed recession by the Germans. Growth builds tax revenues. It's just like the old days when even many economists believed a recession just cleaned out the dead wood so we could rebuild, which led to self-destructive policies in the early 1930s. Now we have learned that the ugly part of recessions is that they feed on themselves and sink economies deeper, clean out more new wood than old, have grave long-term consequences for standards of living, and can destabilize democracies.

Any good news? As recession hits, talk has increased that austerity is not working, as noted above. If Germany itself begins to suffer some pain because it can't sell its exports, the nation may indeed wake up. The self-righteous there may at last be overwhelmed by the rational and sensitive.

Europe, and most importantly Germany, needs to encourage its central banks to lend more. It needs to build its rescue fund, and ultimately it needs to sell eurozone-backed bonds to generate more rescue money and enable it to transfer funds to needy countries as they scale back on spending so that citizens do not suffer so much. The U.S. does just this. There is no mystery, except one. That mystery is how nations repeat their follies so regularly in history.

For all I've said, I am not completely pessimistic. I see the glimmer of a horizon of hope. I think most of Europe believes in the euro and a united continent. I think they will save the day, but just by a hair's breadth. And that's too close for comfort. There is a chance the ship will sail too close to the horizon and fall off the earth.